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COLOMBIA

Observatory of Renewable Energy

in Latin America and �e Caribbean

AUGUST 2011

Final ReportProduct 3: Financial Mechanism

Final ReportProduct 3: Financial Mechanism

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This document was prepared by the following consultants:

HUMBERTO RODRIGUEZ

The opinions expressed in this document are those of the author and do not necessarily reflect the views of the sponsoring organizations: the Latin American Energy Organization (OLADE) and the United Nations Industrial Development Organization (UNIDO).

Accurate reproduction of information contained in this documentation is authorized, provi-ded the source is acknowledged.

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Colombia- Product III

CASE OF COLOMBIA

Final Report

Product 3: Financial Mechanisms

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TABLE OF CONTENT

ABBREVIATIONS AND ACRONYMS .......................................................II1. INTRODUCTION......................................................................................42. METHODOLOGY.....................................................................................53. FINANCING SOURCES...........................................................................5

3.1.1 International financing sources ..........................................................................5

3.1.2 Domestic financing sources ...............................................................................6

4. FINANCING MECHANISMS..................................................................94.1.1 Bancoldex – Colciencias fund..........................................................................10

4.1.2 Bancoldex “aProgresar” Fund..........................................................................12

4.1.3 Financing of renewable energy projects in the private sector ..........................14

4.1.4 Financing of renewable energy projects in the State........................................15

4.1.4.1 Financial Support Fund for Energy Provision in Non-Interconnected Zones (FAZNI)...................................................................16

4.1.4.2 Financial Support Fund for Energy Provision of Interconnected Zones (FAER).............................................................................................17

4.1.4.3 National Royalties Fund (FNR) .................................................................184.1.5 Multilateral Organizations................................................................................18

5. INCENTIVES FOR DEVELOPMENT OF RE PROJECTS ..............226. COMPARATIVE EVALUATION OF THE DIFFERENT MECHANISMS ..............................................................................................24

6.1 LESSONS LEARNED .....................................................................................27

7. ANEXXES.................................................................................................287.1 DTF....................................................................................................................28

8. BIBLIOGRAPHY ....................................................................................29

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LIST OF TABLES

Table 3-1. International financing institutions for project development ................................7Table 3-2. Domestic financing sources for Project development...........................................8Table 4-1. Bancoldex-Colciencias financial mechanism......................................................11Table 4-2. Bancoldex-“aProgresar” financial program ........................................................14Table 4-3. Private banks financing characteristics ...............................................................15Table 4-4. State financed RE projects implemented by IPSE ..............................................17

Table 5-1. Renewable Energy Projects that are CER generators…………………………24

Table 6-1. Comparative characteristics of mechanisms .......................................................25Table 6-2. Value of the IPSE NCES projects underway within 2010 PEZNI by type of technology.............................................................................................................................26Table 6-3. Funding source of IPSE NCES projects underway within 2010 PEZNI ............26Table 7-1. DTF monthly variation during the past 5 years...................................................28

ABBREVIATIONS AND ACRONYMS CDM Clean Development Mechanism CDT Certificado de Depósito a Término (Certificate of Deposit at Fixed Term) CER Certificados de Reducción de Emisiones (Carbon Emission Reduction

Certificates) DTF Depósito a Término Fijo (Fixed Term Deposit) FAER Fondo de Apoyo Financiero para la Energización de las Zonas Rurales

Interconectadas (Support Fund for the Electrification of Interconnected Areas)

FAZNI Fondo de Apoyo Financiero para la Energización de las Zonas no Interconectadas (Support Fund for the Electrification of Non Interconnected Areas)

FNR Fondo Nacional de Regalías (Royalties National Fund) GEF Global Environment Facility IDB Inter-American Development Bank MME Ministerio de Minas y Energía (Ministry of Mines and Energy) PND Plan Nacional de Desarrollo (National Development Plan)

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RET Renewable Energy Technologies SHF Small Hydropower Facility SIN Sistema Interconectado Nacional (National Interconnected System) SME Small and Medium Enterprises UNDP United Nations Development Program UNEP United Nations Environment Program UPME Unidad de Planeación Minero Energética (Energy and Mining Planning Unit) VAT Value Added Tax WB World Bank UNITS AND EXCHANGE RATE kWh kilowatt hour kW kilowatt Rates Rate: 1 U.S. $ (July 2010) = Col $ 1,900

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Colobia- Product III Colombia- Product III

1. INTRODUCTION

Colombia is a country that benefits from substantial renewable energy resources. However the development and use of technologies for the production of clean energy remains at an incipient stage. Small hydroelectric plants along with conventional power plants are the most widely used source of renewable energy under current market conditions in the National Interconnected System (SIN). Financing of small power plants has been accomplished through the conventional private banking system. New and innovative mechanisms for financing projects based on renewable energy technology are yet to be developed. It is then necessary to emphasize that there are actions currently underway by government and private financial institutions in partnership with multilateral institutions to create lines specifically geared towards rational use of energy and renewable energy sources. Development of renewable energy sources thus requires political decisions and a series of measures to assess their attributes, both for use in generation within the SIN and in the non-interconnected zones of the country. A number of barriers such as the absence of an appropriate regulatory framework, the high initial investment costs and the lack of financing mechanisms are barriers that need to be overcome in order to encourage development. Renewable energy projects developed in the country are directed primarily to providing electricity for both the National Interconnected System (SIN) and for communities located in remote and isolated Non-interconnected Zones (ZNI) outside the network. Solar energy for water heating had a very significant development during the early 80´s to the mid 90´s, but far fewer systems are installed now partly due to a lack of strong economic and political incentives.

Even though the use of renewable energy in Colombia is only emerging, the country has a vast supply of renewable resources. It is encouraging to see signs of the government interest in developing policies to promote these types of technologies as can be deduced from remarks by the President of the Republic, the National Development Plan (PND) and efforts by the Ministry of Mines and Energy (MME) through the Mining and Energy Planning Unit (UPME), who mention the goal to come up with a National Plan for the Development of Non-Conventional Energy Sources (DNP, 2010)1.

1 NCES considered include renewable energies (solar, wind, biomass, SHFs (<10 MW), geothermal, ocean energy) and nuclear energy.

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Projects that generate electricity for the National Interconnected System (SIN) have to contend with various barriers: weak regulation that disregards the qualities of renewable energy sources, a lack of incentives, and competition in the SIN from multiple and less expensive large scale hydroelectric generation and other conventional sources, such as coal and natural gas. The current regulatory framework does not specify regulations geared to generation through alternative sources like solar, wind, biomass or geothermal energy. 2

2. METHODOLOGY

The search of information on financing mechanisms was carried out mainly from and with:

• Mining and Energy Planning Unit (UPME)3,

• Ministry of Housing, Environment and Territorial Development (MAVDT)4,

• Electricity generation companies that have recently developed hydropower projects with generating capacities of SHF (<10 MW) and Small Plants (<20 MW).

• Information on Bancoldex5, Colciencias6 and BBVA Bank.

• Diverse web pages from the entities mentioned

3. FINANCING SOURCES

Existing financial sources can be classified either from domestic or from international origins. The following section describes existing financial mechanisms following this classification.

3.1.1 International financing sources

Table 3-1 shows international banking institutions and United Nations (UN) bodies that are closely involved in renewable energy development, environment and climate change.

2 It is important to mention that the current regulatory framework includes all the technologies but it does not establish the optimum conditions for the integration of the generating systems of non-conventional energy sources; meaning that those who wish to buy clean energy can do it even though the cost of it is higher. 3 http://www1.upme.gov.co/ 4 http://www.minambiente.gov.co//contenido/contenido.aspx?catID=829&conID=3046 5 http://www.bancoldex.com/portal/default.aspx 6 http://www.colciencias.gov.co/

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Some of the more recognized institutions are development banks like the Inter-American Development Bank (IDB), the World Bank (WB), and agencies of the United Nations system like the United Nations Environment Program (UNEP) and the United Nations Development Program (UNDP), with funding from the Global Environment Facility (GEF) for projects specifically in renewable energy.

In a subsequent section more detail will be provided on the available funds from these international organizations and procedures to follow for the application to funding from each institution.

3.1.2 Domestic financing sources

In Colombia there are different financing sources for projects with purposes related to infrastructure, innovation and technological development, and support for small and medium enterprises where there is potential for renewable energy projects. Table 3-2 gives information on several (mainly public) organizations that are funding projects of various kinds:

• Long term credit for innovation and technological development projects

• Modernization and technological development of micro, small and medium enterprises

• Development of small and medium enterprises • New ways to create competitiveness and business opportunities

These financial mechanisms are open to a wide range of initiatives in different sectors of the economy and are not specific to renewable energy sources but clearly renewable energy related projects might be eligible for these funds.

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Table 3-1. International financing institutions for project development

Institution/ Description Object Contact address

Inter-American Development Bank (IDB). The Bank has increased its support to the private sector through the Multilateral Investment Fund (MIF), Inter-American Investment Corporation (IIC), the Opportunities for the Majority Initiative (OM) and the Department of Structured and Corporate Financing, all under the IDB's Vice-presidency for the Private Sector and Non Sovereign Guarantee Operations (NSG).

The IDB has supported the government of Colombia and the private sector in key areas of development such as infrastructure, State modernization and reform, small and medium enterprises, agriculture, energy, climate change and environmental protection.

BID, Carrera 7 N 71-21, Torre B Piso 19. Edificio Bancafé, Bogota, Colombia

World Bank (WB) The WB has supported the government of Colombia and the private sector in key areas of development such as infrastructure, modernization and reform of the state, small and medium enterprises, agriculture, energy, climate change and environmental protection.

BM, Carrera 7 N 71-21, Torre A Piso 16. Edificio Bancafé Bogota, Colombia

Tel. (57-1) 326 3600

GEF (Global Environment Facility)

The GEF is an independent financial organization that provides endowments for developing countries to implement projects with global environmental benefits that promotes sustainable development locally.

Promote projects related to Alternative and renewable energy projects.

Managed through agencies like:

IDB, WB, UNEP,UNDP

UNDP

Avenida 82 No. 10 – 62, piso 3.

UNDP (United Nations Program for Development) UNDP helps countries strengthen their capacity to cope with global challenges on energy and environment, trying to find and share best practices, providing innovative policy advice and linking partners through pilot projects that help poor people build sustainable livelihoods.

Bogota PBX: (57-1) 4889000

UNEP (United Nations Environment Program)

Provide leadership and encourage participation in caring for the environment by inspiring, informing and empowering nations and peoples with ways to improve the quality of life without compromising that of future generations.

Clayton, Ciudad del Saber, Edificio 103 - Avenida Morse, Corregimiento de Ancón, Ciudad de Panamá, PANAMA Telf: (507) 305-3100, www.pnuma.org

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Table 3-2. Domestic financing sources for Project development Institution/ Description Object Contact address

Bancoldex- Colciencias Long-term credit funding for innovation and technological development projects. Bancoldex has agreements with over a hundred entities not regulated by the Financial Superintendence. Thus, people can request Bancoldex for resources through some Non-Governmental Organizations (NGOs) and financial establishments.

Bancoldex “aProgresar”

There is a type of credit line called "aProgresar", for companies to invest in productive modernization, conversion or transformation projects. This program provides guarantees for up to 70 percent of the credit value, thanks to an agreement with the National Guarantee Fund.

Investigation projects, technological development and innovation for micro, small and medium enterprises.7..

More information on: http://www.gobiernoenlinea.gov.co/tramite.aspx?traID=1224

FOMIPYME Its main objective is modernization and technological development of micro, small and medium enterprises through financing technological development programs, projects and activities.

Services: Creation of companies - Support to small productive chains - Technology and Production Development - Access to markets and marketing - Innovation in Small Enterprises.

Ministry of Trade, Industry and Tourism, Calle 28 # 13ª – 15

Bogotá, Colombia

FINDETER Calle 103 # 19 -20 Tel: 6230388 - 6230311 - 6322730 Fax: 6230260

FINDETER – ACOPI Promotes and fosters investment in small and medium enterprise sectors.

Web page: http://www.findeter.gov.co/. E-mail: [email protected]

Fondo Nacional de Garantías S.A. NATIONAL GUARANTEE FUND - FNG The role this institution is backing a certain percentage of credits in the financial system, in projects by individuals or corporations.

Carrera 13 No.32-51 Interior 1. Bogota, Colombia. PBX. 323 9000

7All of the information on this mechanism can be found on the following web page: http://www.colciencias.gov.co/sites/default/files/upload/documents/2728.pdf

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4. FINANCING MECHANISMS

As previously mentioned, there are currently no financial mechanisms directed specifically to the implementation of projects using non-conventional energy sources.

This section will describe financing mechanisms that although not specifically designed for renewable energy projects, can finance projects related to renewable energy technologies.

There are a few credit lines, like the Bancoldex - Colciencias line, available for research, technological development and innovation projects (not for implementation). Within this line renewable energy projects are eligible to apply.

As a development and foreign trade bank, Bancoldex initiated a program called “aProgresar” in the year 2004. The “aProgresar” program is designed specifically for small and medium enterprises, financing projects for control and improvement of environmental impacts, under which renewable energies and rational use of energy can apply. Resources available through this fund are limited to US$1.6 million per project (Bancóldex, 2007).

Larger scale projects (i.e. small hydropower plants with investment requirements over US$20 million) can use Bancoldex conventional credit lines with interest rates in the range of DTF8 + 4.09 and DTF + 4.3, and a maximum term of 10 years (See Annex 7.1). In practice, private developers mainly prefer to apply via private banks because of lower interest rates than the combination Bancoldex plus private banks.

Due to the absence of credit lines for project development in renewable energy and rational use of energy, the Ministry of Mines and Energy through UPME is conducting studies for structuring financing funds mechanisms (Pumarejo, 2010).

Additionally, Bancoldex and the Inter-American Development Bank IDB are designing special lines of credit to finance projects in non-conventional energy sources and rational use of energy. This is due in part to unsuccessful credit lines as Bancoldex-URE established in 2002, which had little demand. The Bancoldex-Colciencias credit line has been scarcely used for renewable energy projects (Ojeda, 2011).

8 DTF: Depósito a Término Fijo. DTF is around 3.5% annually (See Annex 7.1 for further details). 9 4.0 mean 4.0% annually.

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4.1.1 Bancoldex – Colciencias fund

Although the Bancoldex-Colciencias fund is not intended to finance the implementation of renewable energy projects, it can be a source of funding for research, technological development and innovation in renewable energy technologies.

The main objective of this fund is to finance research, technological development and innovation projects10. It is intended for use geared towards micro, small and medium enterprises. The application process begins with the completion of the convocation forms. As a minimum requisite, applicants should exist as an organization for at least 12 months and the maximum duration of the project should be 24 months. The financing provided by the Bancoldex-Colciencias fund was created through agreement 015 of November 4, 2003.

The main incentive offered by this mechanism is the prepayment of the first installments (between 25% and 50% of total loans) depending on the innovation effort. The incentive can cover 40% to 50% of the value of the credit if the products are directed to national or international markets, respectively.

With regard to the financing amounts, the fund can finance up to 80% of the entire project for a maximum amount of 10.000 legal minimum monthly wages (approximately US$2.800.000). In this way, the applicant must contribute with minimum 20% of the total amount of the project in cash or in-kind contributions. The interest rate of the credit is negotiable, while the payment term is usually a maximum of 10 years with a grace period of 3 years. Payments must be made in Colombian pesos either in monthly, quarterly o biannual payment installments. The amortization of capital is done considering the biannual expired payment installments. In the case of warranties, these can be from the applicant or can come from the National Warranty Fund (Fondo Nacional de Garantías), up to 80% of the value of the credit.

Projects are received through national summons and are selected through a panel of experts. In order to qualify, the projects must include subjects related to the rational and efficient use of energy, and non-conventional energy. The following subjects can be included in a project:

• Design and development of new products, processes and services that foster energy efficiency.

10 http://www.colciencias.gov.co/sites/default/files/upload/documents/2728.pdf

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• New processes, products and energy sources; or improvement of existing ones with substantial positive impact on the use of energy

• Optimization, simulation and process control

• Development of new methodologies and techniques for managing energy within companies

• Experimental developments and new technologies in non-conventional energy sources

The following table summarizes the main characteristics of this financial mechanism.

Table 4-1. Bancoldex-Colciencias financial mechanism

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4.1.2 Bancoldex “aProgresar” Fund

Since the end of year 2004 the “aProgresar” program and the special credit line “Competitiveness and Productivity Support” are in effect. The special fund “Competitiveness and Productivity Support” permits financing investment projects required by companies to complete their improvement plans, in pesos and US dollars through rediscount and leasing operations (Bancóldex, 2007).

There are two special-quota credit lines, “aProgresar” – Capital Investment, and “aProgresar” - Modernization, Innovation and Technological Development.

The quota corresponding to “aProgresar” – Capital investment aims to strengthen capital flow for Small and Medium Enterprises (SME) of all economic sectors, providing partners and shareholders with funds required for the execution of improvement plans under preferential conditions. The financed plans should be directed to enhance productivity and competitiveness indicators and advance innovation and technological development projects. These resources must be capitalized and registered. The approximate amount of the fund is 215.000.000.000 Colombian pesos initially or its equivalent in US$113 million.

The other credit line, “aProgresar” – Modernization, Innovation and Technological Development offers natural or legal persons considered SMEs, from all the economic sectors, preferential credit for improvement plans. These improvement plans should be directed at enhancing productivity and competitiveness indicators, as well as advance innovation and technological development projects. The quota for this credit line is $644,000,000,000 Colombian pesos, or its equivalent in US dollars (approximately US$339,000,000).

The credit line is valid until the value of the fund is used entirely.

The general objective of the “aProgresar” programs is to invest activities with fixed and deferred assets for micro, small and medium companies. Activities listed as requirements to be eligible for the fund include:

• Modernization and expansion of productive capacity.

• Development, acquisition and transfer of technology.

• New product design and/or added value generation.

• International expansion plan.

• Programs for control and improvement of environmental impacts.

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The application to the fund must be done through a financial intermediary with an available quota in Bancoldex. Subsequently, the application will be sent to the Department of Bank Operations in Bancoldex along with the following documents:

• Data form with the basic credit line information and the special annex “Competitiveness and Productivity Support”.

• Promissory note – Credit request “Competitiveness and Productivity Support” in foreign or domestic currency.

• Introduction letter.

• Annex credit line Competitiveness and Productivity Support - aProgresar

With funds from these programs financing can apply to up to 100% of the investment as long as it is not over $3.000.000.000 Colombian pesos or its equivalent in US dollars (approximately US$1.6 million). The interest rate is of DTF +3.2 plus a negotiable financial intermediation rate. The terms of the investment range from 18 months up to 12 years, if the credit is in Colombian pesos, and from 18 months up to 10 years if the credit is in US dollars. There is a grace period of up to 6 months for operations with a term of up to 3 years payback period. For operations with a payback period over 3 years, the grace period is up to 18 months. Principal payments are made by quarterly o biannual payments of equal installments, and interests are paid monthly, quarterly or biannually.

Since its opening in 2004 until March 2010, “aProgresar” has placed resources for US$ 1.473 million for modernization and productive transformation. However the portion of these resources invested in renewable energy projects is unknown.


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Table 4-2. Bancoldex-“aProgresar” financial program

4.1.3 Financing of renewable energy projects in the private sector

This section describes the funding scheme provided by the private sector for the execution of generation projects with the most widely used renewable energy technology, Small Hydropower Facilities (SHFs).

In order to finance a project, the developer uses its own resources and loans from private banks. The project developer generally contributes from 30% to 40% and takes a credit for

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the remaining 70% to 60% of the total sum of the project. The commercial bank interest rate is DTF (currently 3.9%, see Section 7.1) + 4 to 6 points negotiated with investment banks, and payback periods that generally do not exceed 10 years.

Funding for the project is managed through a trust mechanism and after the project developer invests the resources, the developer makes its investment contributions to complete the project.


Table 4-3. Private banks financing characteristics

4.1.4 Financing of renewable energy projects in the State

The Colombian government has three funds specifically designed to promote energy infrastructure projects: 1) Financial Support Fund for Energy Provision in Non-Interconnected Zones (FAZNI), 2) Financial Support Fund for Energy Provision of Interconnected Zones (FAER), and 3) National Royalties Fund (FNR). All of these mechanisms can be used to develop renewable energy projects, however, FAZNI is the most used for this purpose. These resources are directly allocated stated funds, subject to evaluation and allocation criteria from the state.

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In order to complete the overview of these mechanisms a brief description is presented next.

4.1.4.1 Financial Support Fund for Energy Provision in Non-Interconnected Zones (FAZNI)

The Financial Support Fund for Energy Provision in Non-Interconnected Zones (FAZNI) has become an extremely important financial instrument for financing electricity generation projects in the Non-interconnected Zones (ZNI). This fund was created by Law 633 of 2000, Articles 81 to 83, and regulated by the Regulatory Decree 1124 of 2008, establishing (FAZNI)11.

The objective of FAZNI is to finance energy infrastructure investment plans, programs and projects in the ZNI. This must be done in accordance with the law and energy supply expansion policies for the ZNI given by the Ministry of Mines and Energy. Policy guidelines established by the National Economic and Social Policy in documents Cones 3108 of 2001 and 3435 of 2006, highlight as the provision to finance priority investment plans, programs and/or projects for construction and installation of new electrical infrastructure and replacement or rehabilitation of existing infrastructure, in order to expand coverage and ensure the satisfaction of energy demand in ZNI.

Law 855 of December 18, 2003, defines the locations that are considered non-interconnected zones and sets priorities in allocating FAZNI resources.

Plans, programs and projects eligible for allocation of funds may be apply to FAZNI through various mechanisms established under the fund rules.

As its name implies, this fund focuses on energy expansion and therefore does not consider only electric power but power in general (local production of biofuels, for example), nor does it consider only renewable energy sources. Renewable energy sources must be viable compared to conventional energy and all projects are subject of economic, social and environmental sustainability assessments.

The FAZNI draws on the resources obtained by raising one Colombian peso ($ 1) per kWh dispatched to the SIN, which is included in the prices charged by the generator to the traders and therefore paid by end user through the fees. Local authorities, electricity providers and IPSE are the investment project developers for upgrading and developing new electrical infrastructure in ZNI.


11 http://www.minminas.gov.co/minminas/energia.jsp?cargaHome=3&id_subcategoria=269&id_categoria=71

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Table 4-4. State financed RE projects implemented by IPSE

4.1.4.2 Financial Support Fund for Energy Provision of Interconnected Zones (FAER)

The Financial Support Fund for Energy Provision of Interconnected Zones (FAER) was created by Article 105 of Law 788 of 2002 and regulated by Decree 1122 of 2008. This fund allows local authorities, together with support by electricity providers in the area of influence, to become developers of priority investment plans, programs and projects for the construction and installation of new electrical infrastructure.

The aim of FAER is to expand coverage and ensure the satisfaction of energy demand in interconnected rural areas, according to the coverage expansion plans structured by each Network Operator.

For the adoption and implementation of plans, UPME must approve the project once it meets a series of pre-established rules.

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FAER receives one Colombian peso ($ 1) per kWh transmitted through the SIN Transmission System. This contribution is made by energy transportation companies and is paid by the user under a transmission fee. It is destined to expand coverage and ensure the satisfaction of energy demand in rural areas where interconnection is feasible. 20% of FAER goes to stabilization programs and network optimization of the National Interconnected System (SIN) substandard neighborhoods. The FAER allows local authorities to become developers of priority investment plans, programs and projects for construction and installation of new electrical infrastructure.

4.1.4.3 National Royalties Fund (FNR) The National Royalties Fund (FNR) is endowed mainly with royalties from the exploitation of mining and energy resources in the country. The guidelines and requirements for territorial authorities for the proper use of resources is drawn by the Advisory Council on Royalties, assistant to the National Planning Department and established by Decree 4355 of 2005.

Resources can be used to improve infrastructure, health, education and public utilities, including power supply, construction, assembly, installation and commissioning of infrastructure for: i) electric power generation, ii) the street lighting service; iii) the lines of the Regional Transmission System-STR; iv) electrical substations in the Regional Transmission System, v) distribution networks, and vi) standardization of user connections.

4.1.5 Multilateral Organizations

The general purpose of multilateral organizations is to finance projects that contribute to the development a country in diverse subjects, especially in the reduction of poverty and the creation of opportunities for the majority.

In recent years there has been a growing interest at a global level, in topics involving climate change and the environment. In this way, new opportunities for the development of projects using renewable energy sources have become available. In response to the need of creating renewable energy projects that utilize clean technologies, various multilateral organizations have created instruments for the financing of this type of projects.

The following section will briefly describe International bodies that operate in the country and the financing alternatives that they provide which, even if they are not specifically designed for renewable energy projects, these types of initiatives can certainly apply.

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Inter-American Development Bank (IDB)

The Inter-American Development Bank has an important presence in the financing of development projects in the region since it’s founding in 1959. Through various loans to governments and governmental institutions, the IDB supports a myriad of subjects in the development of its member countries. One of the focus areas of the IDB, is energy sustainability and climate change. Under this area, there are various programs through which projects are financed.

Projects financed by the IDB must meet with the following application process (BID 2010):

1.) Eligibility: Projects must have a high level of impact in the development of the country of origin. They must count with a viable business plan and meet with the eligibility criteria.

2.) Mandate letter and analysis: Once the project is eligible, the IDB may sign the mandate letter, which formalizes the agreement between the organizations. The next step is the process of analyzing the transaction.

3.) Approval: The project is approved they the executive board of IDB

4.) Signing: Once the agreement is signed, the disbursement period may begin, or the solicited warranty may become effective.

The Multilateral Investment Fund (MIF) is a part of the IDB group. Created in 1993 MIF is a fund administered by the IDB with the objective of supporting the development of the private sector in Latin America and the Caribbean. Since its creation, MIF has approved nearly 1.700 projects, reaching approximately 4 million beneficiaries in the entire region (BID, 2011). MIF looks to provide technical and financial assistance to micro and small businesses in order to develop the skills of workers and encourage knowledge and technological transfer.

Through the IDB soft credits and subsides are created for the financing of projects that primarily seek to support stages of project pre-investment.

As a prerequisite for project approval, the project’s executers or promoters must finance a minimum of 20% of the investment cost.

Another organization that is a part of the IDB group is the Inter-American Investment Corporation (ICC). The ICC is a multilateral investment institution whose mission is to promote the economic development of its member countries through the financing of private companies at a small and medium scale (CII 2011a).

One of the requisites for applying to financing through the ICC is that the host company must be profitable and have growth potential. Generally, the company must have sales at around US$5 and 35 million.

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In order to apply for a credit, the first step is to complete a preliminary information form available online at the IIC web page12. This application must have attached historic financial information from the company from to the past three years, and the corresponding financial projections. The approval process is as follows (CII 2011b):

1. Initial Project revision

2. Initial credit proposal

3. On-grounds evaluation

4. Approval by the board

5. Signing of contracts

World Bank (WB) Created in 1994, the World Bank (WB) has an ample scope of work areas in the development of countries on the way to development. Its primary objective is to fight poverty, create knowledge and generate capabilities and associations between private and public sectors. It currently has 187 member countries world wide, with more than 100 offices spread across the globe. (BM, 2011a)

In the energy field, the World Bank Group is committed to the implementation of solutions using renewable energy technologies. In the year 2006 the WB committed funds for US$ 680 million for projects in renewable energy and energy efficiency, which represents an increase of 48% with respect to the year 2005. From this sum, US$190 million are devoted to new renewable energies (meaning wind, solar, biomass, geothermal and hydroelectricity with a capacity of less than 10 MW per central) (BM, 2011b).

The financing mechanisms are carried out through Non-reimbursable Technical Cooperations, Technical Cooperations, Credits, and Analytical Studies. Financed projects are executed in accordance to the needs from each country as described in the National Strategy or National Plan. Financeable sums and interest rates are negotiable and they vary depending on a series of factors.

United Nations Programs (UNDP and UNEP) The United Nations Program for Development (UNDP), and the United Nations Environment Program (UNEP), have offices in Bogota, Colombia, and have developed important projects in the country.

12 http://www.iic.int/

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UNPD helps countries strengthen their capability to confront challenges at a global level on subjects involving energy and the environment. It seeks to find and share best practices providing council about innovative policies and through experimental projects that help generate local capabilities with respect to sustainable management of natural resources, including the development of renewable energy.

Similarly, UNEP’s objective is to direct and encourage participation in the care of the environment by inspiring, informing and giving nations and towns the means to ameliorate quality of life without risking the planet for future generations.

With respect to mechanisms of cooperation, these organizations have Non-Reimbursable Technical Cooperations, and Technical Cooperations where one of the most important intervention sectors is the mitigation and adaptation to climate change, including the promotion of use of renewable energy.

Global Environment Facility (GEF) The Global Environment Facility (GEF) was constituted in the year 1991. It has 182 member countries and associations with international institutions, nongovernmental organizations and the private sector. The objective of GEF is to work with developing countries and countries with economies in transition, in projects related to biological diversity, climate change, and the exhaustion of the ozone layer, among other subjects related to the environment. In general, GEF supports projects in the fields of mitigation and adaptation to climate change.

As a key part of its activities, GEF helps developing countries to reduce greenhouse gas emissions, which generates benefits for local economies and their environmental conditions. GEF programs adopt a long-term perspective and the transformation of energy markets in developing countries, allowing these markets to function in a more efficient way and keeping them away from carbon-intensive technologies. Until the year 2009, GEF has invested US$ 2.7 million in supporting projects related to climate change mitigation, and has attracted US$17.2 million in co-financing other projects. More than 1,000 million tons of greenhouse gas emissions have been avoided with the support of GEF (FNAM, 2011).

Project proposals must meet the following criteria:

• Be held in an eligible country

• Be compatible with national priorities and programs

• Be directed to one or more of the GEF focal areas in ameliorating global climate change and bettering risk reduction perspectives

• Be coherent with GEF’s operation strategy

• Seek financing only for the agreement on incremental costs in the measures to achieve global environment benefits

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• Consider public opinion in the design and implementation of the project

• Have political support from the country’s (or countries’) government

5. INCENTIVES FOR DEVELOPMENT OF RE PROJECTS

In Colombia, two tax incentives have been directly created to meet the purposes related to renewable energy sources. The incentives that are directly related to the Renewable Energy Projects are:

• Exempt income for renewable energy generation under Kyoto Protocol requirements and the allocation of 50% of proceeds from the sale of Certified Reduced Emissions (CERs) to social welfare work and,

• Exemption from import duties for equipment that export CERs.

Literally, according to the Law:

• Law 788 of 2002 Article 18. Other exempt income. Tax code adds the following article:

"Article 207-2. Other exempt income. Exempt income is generated by the following concepts, requirements and controls established by the code:

Sale of electricity generated on wind, biomass or agricultural waste, resulting entirely from generation companies, for a term of fifteen (15) years, provided that the following requirements are met:

a. Apply for, obtain and sell carbon dioxide emission certificates, according to the terms of the Kyoto Protocol.

b. That at least fifty percent (50%) of the proceeds from the sale of such certificates are invested in social welfare projects in the region where the generator operates.

• “Article 95. Duty free imports. the Tax Code is appended with Article 428

containing the following subsections: (…)

h. Imports of goods and equipment made under conventions, treaties, or international cooperation agreements in force for Colombia, for government or public institutions of the national order. This treatment does not work for industrial and commercial state and mixed companies.

i. Imports of machinery and equipment for the development of projects or activities that are exporters of certificates of carbon emission reductions that contribute to

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reducing the emission of greenhouse gases and therefore to sustainable development”.

It is important to note that very specific projects such as the Natural Gas for Vehicles and the development of Biofuels have received a special treatment, differentiated from that of other renewable energy sources, mainly due to a strong political will to implement them.

Clean Development Mechanisms (CDM) Additionally, the Government of Colombia has adopted measures to promote the development of renewable energy sources. The Clean Development Mechanisms have the following impacts on projects:

• Through Clean Development Mechanisms (CDM), projects registered with the UNFCCC get the Certified Emission Reductions (CER) generators status.

• CER generators are exempted from f Value Added Tax (VAT) (16%) on imported equipment not produced in the Andean Community.

• CERs generators must invest 50% of revenue form CER in social welfare programs in the areas of influence.

With the CDM, the exemption of VAT on imported equipment is significant, while revenue from sale of CERs improves the flow of project funds and improves the internal rate of return of the project between 1% and 1.5%(Ortega, 2011).

Despite the vast availability of natural resources in Colombia, the number of renewable energy projects that are executed and planned in the country is very limited. According to information form the Ministry of Housing, Environment and Territorial Development (MAVDT) on MDL projects, there is a total of 152 projects in the Colombian portfolio of which 39 correspond to energy (26%). Out of the total, 61 have national approval and 15 of these are related to energy. From the 152 projects in the portfolio, 24 have completed the registration process from the CMNUCC, of which 6 correspond to energy. From these 6, a total of 5 are renewable energy projects and generate CERs (see Table 5-1). The average power of the projects is of 15 MW, indicating that these are small projects. Four (4) are SHF and the other one is a wind park which is considered a technological innovation by Colciencias.

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Table 5-1. Renewable Energy Projects that are CER generators

6. COMPARATIVE EVALUATION OF THE DIFFERENT MECHANISMS

Table 6-1 shows the main characteristics of the different mechanisms. It is important to note that the Private Banking Mechanism and the IPSE implementation of FAZNI projects are the most successful in terms of number of projects implemented and capacity of the implemented projects.

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Table 6-1. Comparative characteristics of mechanisms

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In addition to these projects developed by under private sector scheme, IPSE is developing in the ZNI 23 renewable energy projects employing different Renewable Energy Technologies (RET) (Table 6-2). Table 6-2. Value of the IPSE NCES projects underway within 2010 PEZNI by type of technology

Source: Own elaboration from IPSE data (IPSE, 2010)

For developing the projects, IPSE funded them with different resources. The largest funds correspond to the execution of a SHF project with international funding, but all other resources (49.2%) are State funds from FAZNI, the IPSE and national budget transfers (Table 6-3).

Table 6-3. Funding source of IPSE NCES projects underway within 2010 PEZNI

Source: Own elaboration from IPSE data (IPSE, 2010)

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6.1 LESSONS LEARNED

In financing projects in the country, it is important to note the following:

• Initial costs are high and there are uncertainties in the generation.

Renewable energy technology projects have high initial investment costs. Uncertainty in generation capacity and reliability of non-dispatchable energy like solar and wind, increase the perceived risk to the financial sector.

• Marginality of CDM.

The CDM as a funding mechanism constitutes only a marginal source for the development of power generation projects because the SIN emission coefficient of Colombia is very low (0.285 kg / kWh). The CDM could play a greater role in power generation projects in the ZNI where fuels are used for generation

• Limitations of local financial market

The scale of capital constitutes in itself a major obstacle to obtain sufficient credit for a project. The time limits are too short compared with the equipment or the life of the investment. Short-term credits place a heavy burden on investors in Colombia. There is also no clear mechanisms for risk management RET projects.

• Uncertainty in regulation

The absence of regulation for RET is a real barrier for investors who notice little development in the regulation

• Tax structure

Investors pay taxes on the capital invested and since it is high per unit of installed capacity in renewable energy technologies, as compared to conventional technologies, then investors perceive these high taxes as an extra burden.

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7. ANEXXES

7.1 DTF

The DTF is a weighted average of interest rates of certificates of 90 days fixed term deposit (CDT: Certificado de Depósito a Término) offered by the Colombian financial system.

The DTF in 2010 remained stable at around 4%.

Table 7-1. DTF monthly variation during the past 5 years.

Source: Banco de la República

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8. BIBLIOGRAPHY

Bancóldex. (2007). "a Progresar" 336_circular_005_2007. Bogotá: Bancóldex.

Banco Interamericano de Desarrollo (BID), 2011. Que es el FOMIN. Disponible en: http://www5.iadb.org/mif/acercade/QueeselFOMIN/tabid/164/language/es-ES/Default.aspx [Accedido Junio 22, 2011].

Banco Mundial (BM), 2011a. Quienes somos. Disponible en: http://web.worldbank.org/WBSITE/EXTERNAL/BANCOMUNDIAL/QUIENESSOMOS/0,,menuPK:64058517~pagePK:64057857~piPK:64057865~theSitePK:263702,00.html (Accedido Junio 22, 2011)

Banco Mundial (BM), 2011b. Energía Renovable y Eficiencia Energética. Disponible en:

http://web.worldbank.org/WBSITE/EXTERNAL/BANCOMUNDIAL/NEWSSPANISH/0,,contentMDK:20725535~pagePK:64257043~piPK:437376~theSitePK:1074568,00.html

Corporación Interamericana de Inversiones (CII), 2011a. Cómo solicitar financiamiento de la CII. Disponible en: http://spanish.iic.int/apply/ [Accedido Junio 22, 2011].

Corporación Interamericana de Inversiones (CII), 2011b. Cómo trabajar con la CII. Disponible en: http://spanish.iic.int/IIC-FLASH/ciianimado.html [Accedido Junio 22, 2011].

DNP. (2010). Plan Nacional de Desarrollo 2010-2014. Bogotá: Departamento Nacional de Planeación (DNP).

Fondo para el Medio Ambiente Mundial (FMAM), 2011a. Acerca de FMAM [En línea] Disponible en: http://www.thegef.org/gef/node/2492 [Accedido 7 de julio de 2011]

IPSE. (2010). PEZNI 2010. Bogotá: IPSE.

Ojeda, Y. (2011, Enero 21). Colciencias. (H. Rodríguez, Interviewer)

Ortega, G. (2011, Enero 24). Director Generadora Unión. (H. Rodriguez, Interviewer)

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Pumarejo, A. J. (2010). Diseño de Esquemas Financieros para proyectos URE y Fuentes No Convencionales de Energía. Bogotá: UPME.

UPME-MME. (2002). Diseño e implementación de las líneas de crédito IFI-URE y Bancoldex-URE. Bogotá: UPME- MME.

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